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Data as an asset part two: Digital markets in M&A - friend or foe?

  • Global
  • Competition, EU and Trade
  • Corporate
  • Mergers and acquisitions
  • Privacy, data protection and cybersecurity
  • Technology


This is the second article in a series of monthly articles on how to leverage the value of data and navigate the potential obstacles. Throughout this series, we will discuss how data as an asset is impacting M&A transactions and other strategic business areas. You can read the first article in the series here, which focuses on data as an asset in the context of corporate law transactions.

The last few years has seen jurisdictions around the world bring to life legislation for the governance of digital markets. Particularly given recent market developments, governments and regulators are facing increasing scrutiny to establish adequate safeguards and properly monitor an industry which to many has been left to its own devices for far too long – albeit at the same time, to not stifle innovation.

In the UK, the focus has been on promoting competition and innovation in digital markets. As part of this strategy the Digital Markets Unit (“DMU”), which sits within the Competition and Markets Authority (“CMA”), was established in April 2021. Once the proposed Digital Markets, Competition and Consumer Bill comes into force (expected in October 2023), the DMU will be empowered to regulate businesses that it deems to have ‘strategic market status’, being those who have substantial and entrenched market power in an activity, providing the firm with a strategic position. Businesses designated as such will need to comply with bespoke codes of conduct, with their planned corporate transactions being subject to oversight under a more targeted merger control regime.

In the EU, the Digital Markets Act and the Digital Services Act were adopted in July this year. Whilst the former is intended to ensure a level playing field for digital companies (regardless of their size) by essentially setting out a list of ‘dos’ and ‘don’ts’, the latter will improve control over what users see online, increasing understanding as to why specific content is recommended. Although the US is yet to announce comparable measures, the Department of Justice has warned enforcers to watch for ‘tipping point’ mergers in the digital sector that could change the competitive dynamics in the market.

Digital sector: In a league of its own

Whilst most markets can be effectively compared and contrasted when being weighed from a competition perspective, the digital sphere brings its own separate challenges.

Conventionally speaking, mergers tend to be considered in terms of their horizontal and vertical overlaps (amongst other things), which means considering to what extent a merger has the potential to reduce competition operating at the same level and foreclose the market (either upstream or downstream). By distinction, digital platforms tend to operate predominantly online and trends have shown that they rarely seek to acquire their competitors, but rather complementary assets sometimes with an entirely different offering. In any other industry, acquisitions of this type would unlikely raise competition law concerns. The issue considered prominent by many in this behaviour is the ability for dominant players to further entrench their market power through establishing ties in adjacent markets, resulting in a gatekeeper role for a broad range of services.

A universally accepted set of criterion for establishing a market definition where online platforms are concerned is yet to be determined. Direct and indirect network effects govern the interdependence between the various market sides and, whilst some national competition authorities have previously considered indirect network effects (which consider the interaction of user groups) when defining the market, they are typically considered as part of the competitive assessment stage. Similarly, it is argued by some that the traditional ‘SSNIP’ (small but significant non-transitory increases in prices) test is incapable of capturing the complexity of the sector, particularly since many offerings are seemingly free of charge. That said, the draft revised EU Market Definition Notice does offer some new guidance on multisided platforms and digital ecosystems, whilst recognising the overlapping and, at times, complicated market effects. In the same vein, digital markets are often characterised by companies that collect large amounts of personal data from users. Some argue that the resulting competitive effects warrant a separate market.

The opportunities for the likes of venture capitalists and start-ups in the industry are plentiful, with growth incentives being taken advantage of frequently. That said, ambiguity as to the mood of regulators may begin to leave a bad taste in the mouths of those who stand to lose. Investments may be stunted, leading to less innovation and fewer start-ups, to the detriment of consumers. It is likely that the ambition of many start-ups (as well as their investors) is to be acquired by a larger platform and to have their visions realised. Where successful, this arguably presents competitors with higher barriers in terms of innovation given their size and resource in comparison.

The age of ‘everything apps’

The growing success of multisided platforms has prompted fierce consideration by others in the digital industry as to the fluidity of their offerings. Multisided platforms work by providing a product or service that connects two or more participant groups, whilst playing an intermediation role. Its value proposition is to enable this connection, making it easier for them to find and relate to each other. Recent times have seen a number of social media platforms extending their service output to include the likes of payments and ecommerce, whereby network effects can be utilised.

Whilst arguably multisided platforms produce lower prices and more choices for consumers, the business model requires that a number of factors align in order to promote success. This includes consumption, in that a platform must be regularly acquiring and retaining an audience. One of the ways in which companies have historically sought to do this is through the acquisition of complementary offerings, though (as earlier referenced) recent times have seen a crackdown in some jurisdictions on such transactions, whereby it has been deemed anticompetitive to allow acquirers to increase such market power (for example, Apple / Shazam).

Cause for concern?

As the real value of “data as an asset” to acquisitions remains unclear, merging parties continue to come under scrutiny as regulators work to determine the impact accumulating data will have on their ability to further entrench market power. As authorities recognise a danger but struggle to properly articulate meaningful theories of harm, what is the risk in digital platforms gaining harmful strength?

As well as competition law issues, the acquisition of data through M&A has raised a red flag in the eyes of privacy groups. In particular, some consider that the monetisation of health-related data has the ability to harm rather than benefit consumers. Similarly, some consider that particular types of data should never be requested or collected, as this provides the recipient with the opportunity to further manipulate the user.  The ownership of data can sometimes present ambiguity in itself, with fierce debate as to who owns the likes of mobility data – the car manufacturer, the GPS provider, the insurance companies or the car driver? That said, the European Commission nor the CMA have yet to block or clear a deal with remedies over data accumulation concerns.

Historically, data accumulation has been a matter dealt with by data privacy regulatory and supervisory authorities. In recent times, privacy regulatory authorities have been upping the ante when it comes to matters relating to excessive collection. Further, a key privacy principle of many mature data privacy regimes, data minimalization, often flies in the face of data accumulation. Data is available in great volume from a variety of sources and, as such, competition authorities have so far been reluctant to conclude that data assets cannot be replicated (see, for example, Thomson / Reuters).

The benefits of data accumulation should not be overlooked. In seeking to understand users through the collection of data, platforms have the opportunity to offer consumers solutions which have an increased relevance to individual needs and may otherwise not exist, are better value for money than those perhaps offered by competitors and encourage wider continued innovation in the industry. The problem is that this is often two sided. Whilst data accumulation may encourage innovation, it may also stifle it if it is hard to replicate. These elements underpin the aims of competition, with the wellbeing of consumers at its heart. It, however, remains to be seen whether they outweigh any perceived negative effects on broader competition.

Facing the future

Global convergence in addressing competition concerns in digital markets means more questions continue to be raised than are being answered. Each jurisdiction has its own economic reality and priority sectors, as well as their view on the way in which competition ought to be governed. Whilst some are perhaps keen to ensure businesses thrive irrespective of dominance (with arguably little to no evidence of negative effects), others have been more proactive in establishing safeguards having learned lessons from those slow to react. Striking the correct balance in the implementation of new legislation will continue to present its challenges, particularly from those more cautious as to the harm over-policing may do to an innovation-rich industry which perhaps stands only to benefit consumers.

Further weight will be added to either argument as the decisions concerning digital acquisitions following investigation continue to be made and subsequently appealed in the various courts. Similarly, the extent to which data may be considered an asset and its value in any given situation will need careful consideration, most likely as part of collective actions in an abuse of dominance setting.

It remains to be seen the effect blocking acquisitions or requiring drastic remedies may have on the wider market. Innovation inevitably leads to a boost in employment rates as businesses seek to employ and retain the best talent to support their growth. The potential for significant downsizing or reduced innovation incentive where platforms are not afforded the opportunity to thrive whilst maintaining dominance has the potential to be a very real consideration for some. Whether this will be borne in mind holistically as part of decision-making is unclear.

As national competition authorities look to address their concerns surrounding the adequate governance and scrutiny of digital markets, we expect a growing reference to platform-related activity as part of merger control legislation and associated guidance. Where faced with the prospect of substantial criticism, there is no doubt stakeholders (including the likes of platforms, investors and national competition authorities) will continue to press for transparency as to priorities and decision-making. 

With digital regulation gathering pace, businesses should be vigilant as to the impact of new obligations and the applicability of guidance to anticipated acquisitions. Though much remains in draft and so subject to change, publications to date serve as a helpful steer as to the strategies and ambitions of regulators. As a number of high profile investigations concerning digital platforms make their way through the courts, the positions taken on the likes of value assigned to data will soon be established.